Milk must move farther to serve southern Calif. plants

Editor's Note: Ching Lee is the assistant editor of Ag Alert, the newsletter for the California Farm Bureau Federation.

With more dairies disappearing from Southern California and a shrinking milk supply to serve processing plants in that region, dairy farmers and their cooperatives say they are now moving their raw product much longer distances at greater cost to accommodate those markets.

"We have been deficit in milk production relative to our customers' needs for quite some time," said Eric Erba, senior vice president and chief strategy officer of California Dairies Inc., the state's largest dairy cooperative. "It's just that now instead of being able to pull milk from, say, southern Kern County to satisfy all the customers' needs, we're having to pull it from occasionally northern Tulare County."

He noted the cooperative has lost a number of dairies in Southern California, but its customers are requiring at least as much milk as they used to. Meanwhile, there are no new dairies being developed or planned south of Kern County, where the milk deficit is.

Since dairy farmers typically pay the cost of hauling their milk to the plant, their inclination has been to ship to plants closer in vicinity, leaving plants in urban centers such as the Los Angeles basin with an inadequate milk supply, said Michael Marsh, CEO of Western United Dairymen.

Historically, plants that bottle fluid milk or make products such as yogurt, cottage cheese and ice cream—that is, milk going to higher-value uses—tend to be located in areas with larger populations, while manufacturing plants that produce butter, cheese and dried milk powders—the lower-value uses—tend to operate where the milk supply is, Erba said.

Under the state's current milk-pooling system, milk-sales revenues are distributed equitably among producers in the pool, removing the economic incentive for producers to ship milk to those higher-value uses—or Class 1, 2 and 3. To ensure plants in deficit markets have a reliable milk supply, transportation allowances were created to partially compensate producers for the cost of hauling milk to those plants.

These allowances—which apply only to plants receiving Class 1, 2 and 3 milk—are taken out of the producers' revenue pool at an annual cost of about $27 million, according to the California Department of Food and Agriculture.

Erba said California Dairies Inc. currently serves 12 to 15 customers in Southern California. It is using more of its transportation allowances to cover the longer hauls, and the available funds are not enough, he said. For this reason, the cooperative has asked CDFA to consider changing the current rates to bring them into better alignment with what it calculates to be the actual cost of milk movement.

The CDI proposal is one of three the department has agreed to consider in a public hearing on April 4. The original hearing request actually came from Wallaby Yogurt Co. in Napa County, a region that's currently not eligible to receive the transportation allowance. The organic yogurt processor is asking CDFA to include Napa County in the allowance program, since it competes for milk with other plants in the North Bay that do qualify for the allowances.

Marsh said the program historically has been "widely supported by producers" even though it reduces the pool prices they receive, because producers want their milk to go to higher uses, which ultimately bring in more revenue to the pool.

"They also want to make sure it's California milk going to those plants versus milk from Arizona or Nevada," he said.

Rob Vandenheuvel, general manager of the Milk Producers Council in Ontario, said while dairy farmers support the concept of the program, they also want to ensure the closest milk ends up moving into those urban areas first.

"When you set these rates and mileage brackets, it's always possible that you've now created an incentive where perhaps it makes more sense for milk to come from farther away," he said.

He also said he believes processors should share in the cost of funding the transportation allowance. The council had submitted its own proposal to CDFA to include such a concept, but CDFA declined the proposal.

The last time the department held a hearing on the transportation allowance was in 2008 to address surging fuel costs. It later approved a 20 percent across-the-board increase to all rates.

"We might not like the system we have—and I'll be the first to admit that it's not working the way it was originally conceived," Erba said. "It's getting to be much more expensive, but that's because when it was originally conceived, I don't think anybody projected that we'd be moving milk as far as we are right now—or that the cost of fuel would be close to where it is now."

Attracting enough milk to supply fluid plants was also less of a concern in the late 1960s and early 1970s, when use of Class 1 milk hovered near 65 percent of California's total milk production, according to CDFA. Today, Class 1 utilization is about 15 percent, while almost three-quarters of the state's production is used in cheese, butter and dry milk products.

Erba, Marsh and Vandenheuvel all agree it is highly unlikely for any of the Southern California plants to move closer to where the milk source is, as they are multi-million dollar investments that are already working assets. Trying to get a permit anywhere in California to build a new plant is a difficult and lengthy process, Marsh added.